Peak oil review - April 23

1. Oil and the Global Economy Last week, the oil markets were mixed with NY oil finishing the week up a bit to a close of $103.88 and London closing down a couple of dollars at $118.64. With the Iranian nuclear negotiations underway the level of bellicose rhetoric has dropped considerably. However the Syrian situation, which continues to deteriorate, and the sanctions on Iran’s oil exports, which continue to tighten, serve as reminders to the markets that the Middle Eastern situation could get worse before it gets better.

There is growing concern that the US and global economic situation is not looking as good as it did earlier this year. Some believe the unusually warm winter moved some of the spring’s usual economic activity ahead giving the impression that the economy was starting to move. Some are opining that $4 gasoline in the US and $9 gasoline in Europe might be slowing things down a bit. Interest rates on European debt are beginning to rise and US employment, home sales, and industrial production numbers are not looking as good.

Warm weather continues to drive down US natural gas prices with new 10-year lows being set last week. As prices continue to trend downwards analysts are expecting to see $1.85 per million BTU’s shortly. No end to the warm weather is in sight and it will be a while before air conditioning demand kicks in. Rigs drilling for natural gas climbed by seven last week to 631 after slipping to the lowest level in 10 years from a recent peak of 936 in mid-October. It is likely that the increase in rigs drilling for gas are doing so in liquids-rich areas. The EIA now expects that US gas output for 2012 will reach 69.3 billion cu ft. per day – up 4.5 percent for the year. Rigs drilling for oil reached a 25-year high of 1,337 last week.

NY gasoline futures continue to fall and are now down 25 cents per gallon since early April. Retail prices have not followed as rapidly with the AAA saying that gasoline fell only 4 cents a gallon in the past week and only 2 cents in the past month. Many states are still above or close to $4 a gallon. Some observers are predicting that we have already seen the peak in gasoline prices for the year and that they will continue to fall in the months ahead. According to MasterCard, gasoline consumption the week before last was down 6.8 percent from the same week in 2011.

The Philadelphia refinery situation is still an open question. The larger of the two Sunoco refineries is still scheduled to be closed in July and the reports that Delta Airlines is negotiating for the other are considered ludicrous by most observers. The price jump that comes with the transition to summer gasoline blends is still a few weeks away and sanctions on Iranian oil exports are still tightening. All this suggests that predictions we have seen a peak in gasoline prices may be premature.

Iraq’s second single point mooring system went online last week, adding another 450,000 b/d of export capacity. Baghdad hopes to increase exports from Basra from the current 2.15 million b/d to 2.75 million b/d by the end of the year. Another round of bombings occurred in Iraq last week with 35 killed and 100 injured across 10 cities. Most of the attacks were against security installations in Shia areas and were intended to show that the government cannot provide for public safety.

2. The Iranian Confrontation By recent standards, it was a relatively quiet week in the confrontation. Both sides say that the meeting on April 14th was generally satisfactory with Tehran willing to discuss their nuclear program rather than simply airing a list of grievances. The meetings are scheduled to resume on May 23rd in Baghdad.

The five week delay in the meetings brought forth protests from Israeli Defense Minister Barak that the talks were simply a stalling operation on the part of Tehran and that participating in talks does not exempt Tehran from Israeli attacks on their nuclear facilities. Barak again denied that there is a deal with Washington to not launch attacks as long as Tehran is willing to talk. To back up this threat, Israeli television broadcast a detailed and unprecedented account of Israeli Air Force preparations for strikes on Tehran’s nuclear facilities.

In the meantime, preparations for the embargo that is due to start in about two months continue. Many observers are saying that inability to get insurance on shipping to and from Iran may be more effective than direct sanctions on oil exports. Some 90 percent of shipping insurance is written by Western firms, leaving only China, India, Japan, and Tehran itself to offer coverage to foreign ships. Foreign shipping companies, however, say they have no faith in Tehran’s willingness to pay claims. The Indian, Chinese, and Japanese governments are considering whether to write insurance on Iranian oil cargoes coming to their countries.

Tehran accused the Saudis of attempting to replace Iran’s oil exports by increasing production to more than 10 million b/d. Iran’s Oil Minister expressed doubts that the Saudi’s will be able to maintain the current rate of production for long. The IEA continues to say officially that the Saudis can increase production to 12 million b/d, but some outside observers have doubts that such a rate can be sustained.

3. The EU’s debt crisis After a month or so out of the headlines, the EU’s economic problems are once again moving oil prices. Last week started with Spain’s bond yields breaking above 6 percent raising fears that a bailout of Madrid is not far away. Although the bond crisis subsided by week’s end, the debate over the euro zone’s future continues. Most observers agree that the EU is headed back into another recession that will be amplified by the wave of austerity measures sweeping Europe. With government spending being slashed everywhere, many are wondering just how economic growth will ever be restored to the continent.

The situation currently is being exacerbated by the French Presidential election which seems likely to result in policy changes affecting euro zone bailouts, oil embargoes, Syria, immigration, and other key issues. The role of the European Central Bank continues to be debated. Both French President Sarkozy and his main challenger would like the bank to take the lead in relieving fiscal pressure on hard pressed governments in the manner the US Federal Reserve has been doing. By law the European Bank’s job in to contain inflation and not to help stimulate economic growth, however. Few expect that any important changes to the bank’s mandate will come soon.

Last week the IMF announced that it had added $430 billion in extra lending capacity to used if the euro zone crisis deteriorates. This money will be added to a $200 billion commitment previously made by the euro zone countries themselves. Oil consumption in EU has been falling for several years and high oil prices and taxes have pushed gasoline into the $8-9 a gallon range putting additional pressures on fragile economies. In two months the EU’s oil embargo on Iran will be in force. While governments hope that offsetting oil flows will come from other countries, the situation is far from clear and further deterioration of the EU’s financial situation this summer is possible. For the oil markets the concern remains that we could be entering another period of recession or worse.

4. Argentina nationalizes YPF The nationalization of Spanish oil company Repsol’s 51 percent interest in Argentina’s largest oil company, YPF, has set off a wave of protest in Europe. The company which used to belong to the Argentine government was sold off in wave of privatization in 1989. Buenos Aires says the company was not reinvesting its profits in Argentina, but was transferring them back to Spain. Repsol, which has demanded $10 billion in compensation, suggests the move really was aimed at getting control of Argentina’s recently discovered Vaca Muerta shale gas formation which some say could be the third largest such formation in the world.

After Argentina rejected Repsol’s demand for $10 billion in compensation, Spain announced that it would retaliate against what it deems an illegal act. Madrid has already announced that it would stop importing $900 million a year worth of Argentine biofuels and warned there would be other retaliatory measures. In support of Spain, the EU parliament condemned Argentina’s move and called on the EU to look at partial suspension of Argentina’s tariff preferences.

Repsol had been in negotiations with China’s Sinopec to sell its 57 percent share in YPF – a deal which presumably has been killed by the nationalization. Spain recently has been Argentina’s top foreign investor with some $23 billion going to the country in 2010. Some analysts are already noting that outright expropriation sets a very bad precedent that will likely stifle foreign investment in the country. Argentina is already involved in a trade war with the UK over ownership of the Falkland Islands and its recently discovered oil.

Quote of the week“Our massive economic growth over the past 150 years has been closely associated with, and dependent upon, a similar growth in energy use, especially oil. But we're not growing economically much anymore... And all of our economic theories are built on the principle that economies grow. We're entering the second half of the age of oil, a time during which the production of oil can no longer increase year after year. It will eventually decline and it's going to be very different.” - Charles Hall

The Briefs (clips from recent Peak Oil News dailies are indicated by date and item #)

Israel's biggest gas discovery, potentially turning the fuel importer into an exporter, is prompting a race by nations from Lebanon to Turkey to tap similar deposits in disputed waters of the East Mediterranean. Noble Energy is developing the Leviathan and Tamar fields off Israel that hold about 30 trillion cubic feet of gas, more than triple the U.K.'s remaining reserves and worth about $670 billion at today's prices. (4/19, #9)

The Russians appear to be making a determined bid to secure a stake in the energy boom in the eastern Mediterranean despite the danger of conflict. Israel, Lebanon, Cyprus, Greece and Turkey are vying for control of the offshore natural gas fields in a region long-deprived of energy resources. (4/21, #6)

Pressure intensified on Chesapeake Energy as analysts called on it to overhaul corporate governance and warned that the company's financial structure and liquidity concerns could present a risk for shareholders. The calls for change came in the wake of revelations that entities controlled by Aubrey K. McClendon, the company's founder and CEO, borrowed up to $1.4 billion from a private-equity firm that has done hundreds of millions of dollars in deals with the company. (4/21, #11)

Proposed West Coast coal export terminals for shipping coal mined in Wyoming and Montana to Asia are facing increasing scrutiny. If all the Pacific Northwest projects were built, as much as 150 million tons of coal could be exported annually, equal to almost 50 percent more than the country's coal export output for 2011. (4/21, #12)

Canadian natural gas deliveries could drop as much as 2.6 Bcf/d from 2011 to 2014, as drilling activity slows in dry gas plays and prices remain low. The slowdown in estimated marketed gas production is tied to low gas prices and producers' focus on higher-priced liquids. (4/21, #15)

Ford will invest US$760 million to build a new assembly plant in Hangzhou, China with its joint venture Changan Ford Mazda Automobile (CFMA), adding initial capacity of 250,000 units. When Hangzhou opens in 2015, Ford's total passenger car capacity in China will increase to 1.2 million units annually, doubling current output. (4/20, #17)

After a long and arduous battery of inspections, not to mention many power failures and blackouts, Japan is ready to resume using nuclear energy after Japanese Prime Minister Yoshihiko Noda last week declared that two reactors were safe to reactivate and operate after having passed computerized "stress tests". (4/20, #18)

Japan's imports of liquefied natural gas rose to a record last fiscal year as utilities turned to fossil fuels after the Fukushima disaster led to the shutdown of almost all the nation's atomic reactors. (4/19, #15)

Oil Search said it has struck more gas in Papua New Guinea, firming up the potential of its recent P'nyang discovery to support an expansion of its US$15.7 billion gas-export joint venture with ExxonMobil. (4/20, #19)

BP announced it reached a definitive agreement that settles the bulk of the claims related to the Deepwater Horizon oil spill in the Gulf of Mexico. BP estimates the cost of the settlement at roughly $7.8 billion paid to the Plaintiffs' Steering Committee, which will come from the $20 billion trust fund established for fines and penalties associated with the 2010 spill. (4/20, #22)

Exploration in the Utica shale deposit in Ohio is in the very early stages, though results are encouraging, Anadarko Petroleum said. (4/20, #23)

The world has more undiscovered, technically recoverable natural gas resources than previously estimated, according to the US Geological Survey's (USGS) World Petroleum Assessment released Wednesday. Excluding the US, USGS estimates the world to have 5,606 trillion Tcf of undiscovered, technically recoverable conventional gas, compared to 4,669 Tcf of gas estimated in 2000. USGS officials attributed the increased estimate for natural gas resources to the inclusion of more areas in the new assessment, including offshore areas and regions such as the Arctic and East Africa. (4/19, #5)

Iraq's oil ministry said that ExxonMobil is not allowed to bid in the May energy auction because of its oil deals with the Kurds. (4/19, #8)

TransCanada submitted a reroute of its Keystone XL oil pipeline to the Nebraska state government Wednesday, moving a step closer to reviving the project after it was rejected by the US government earlier this year. The reroute will avoid an environmentally sensitive area. (4/19, #18)

A US House panel approved of a measure that would tie any potential release of U.S. strategic oil reserves to an increase in domestic oil and gas production. (4/19, #19)

Two years after the Gulf of Mexico oil spill, scientists say they're finding trouble with sick fish that dwell along offshore reefs and in the deep waters - especially in places where the oil spill hit the hardest. The scientists are unsure what's causing a small percentage of the fish they're catching to have large open sores and strange black streaks. (4/19, #21)

A below-average Atlantic storm season in 2012 probably will provide little support for energy prices. Only four hurricanes are expected this year, according to researchers at Colorado State University who pioneered long-range Atlantic forecasting. (4/19, #22)

Dow Chemical will build a multibillion-dollar plant to convert natural gas into the building blocks of plastic, becoming the latest chemical maker to capitalize on the abundant gas supplies that are helping spur a renaissance in US manufacturing. (4/19, #25)

Britain may have enough offshore shale gas to catapult it into the top ranks of global producers, energy experts now believe. While production costs are still high, new US technology should eventually make reserves commercially viable. (4/19, #28)

French oil major Total will cut oil supplies at a deep oil platform off the coast of Angola for maintenance in June. Girassol is one of OPEC member Angola's largest fields and can pump up to 250,000 b/d. West African crude oil traders said that operator Total would cut production in order to inject new volumes from a satellite field to sustain output as reserves fall. (4/18, #4)

The Obama administration proposed new measures to limit speculation in the oil markets, seeking to draw a contrast with Republicans who have been calling for more domestic drilling during a time of near record gasoline prices. The new proposals require oil traders to put up more of their own money for transactions, ask for more money for market enforcement and monitoring activities, and call for higher penalties for market manipulation. (4/18, #11)

Shell Pipeline said it will extend by one week the open season for comments on the planned reversal of a pipeline that would bring crude oil from Louisiana to the Houston refining hub. (4/18, #13)

A Texas court ruling classifying drilling for oil and gas as a manufacturing process would cost the state up to $4.4 billion in revenue, its comptroller has warned. (4/17, #18) (4/18, #14)

Scientists may hesitate to link some of the weather extremes of recent years to global warming - but the public, it seems, is already there. A new poll shows that a large majority of Americans believe that this year's unusually warm winter, last year's blistering summer and other weather disasters were probably made worse by global warming. And by a 2-to-1 margin, the public says the weather has been getting worse, rather than better. (4/18, #17)

The IEA said it was investigating implications of a potential investment shortfall in upstream activity in the Middle East and North African energy sector. The International Energy Agency said much of the world's remaining oil and natural gas reserves are in Middle East and North African countries. (4/17, #5)

Cheniere Energy Inc. received federal approval to construct what would be the first major natural gas export facility in the lower 48 US states, putting the company a step closer to shipping some of America's newly abundant natural gas abroad. (4/17, #21)

The US EPA has released the 17th annual US greenhouse gas inventory. The final report shows overall emissions in 2010 increased by 3.2% from the previous year. EPA attributes the trend to an increase in energy consumption across all economic sectors, due to increasing energy demand associated with an expanding economy, and increased demand for electricity for air conditioning due to warmer summer weather. (4/17, #22)

Rosneft and Exxon Mobil concluded an alliance that will secure vital know-how and upstream access to North America for the Russian state oil firm and increase the US major's global reserves base. (4/17, #26)

The UK government said shale gas exploration can resume in the north of England if new procedures are followed, despite evidence that Cuadrilla Resource’s operations in the area caused two earth tremors last year. (4/17, #27, #28)

China has aggressive plans to increase the role of natural gas in meeting its energy needs. Estimates suggest that the country may as much as quadruple its gas consumption levels last year by 2020 and is looking to meet this demand from a number of sources including LNG. (4/16, #12)

President Obama quietly signed the “Supporting Safe and Responsible Development of Unconventional Domestic Natural Gas Resources Executive Order” which will create what amounts to a Presidential super committee that will oversee the regulation and development of the ‘unconventional’ natural gas. (4/16, #13)

Tom Whipple is one of the most highly respected analysts of peak oil issues in the United States. A retired 30-year CIA analyst who has been following the peak oil story since 1999, Tom is the editor of the daily …

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